The AIFMD regulation comes into force in the 27 countries of the European Union in July 2013. The main tenets of this wide ranging legislation are now well known throughout the industry. Put simply, AIFMD will change the alternative investment industry forever. This is the first in a 2 part "Global Perspectives" white paper examining what fund managers should be doing right now to ensure they are ready for AIFMD. We will publish Part 2 of this white paper next month (June 2013). Email shane@globalperspective.co.uk to receive this free white paper. ​Currently fund managers should be completing a detailed impact assessment to ensure they are ready for AIFMD. Global Perspectives (www.globalperspective.co.uk) can assist in completing your AIFMD impact assessment and implementing its requirements. Sign up for all free monthly Global Perspectives White Papers here:- http://www.globalperspective.co.uk/aifmd#!whitepapers/c1a4e or email:- shane@globalperspective.co.uk

1. Date 2 May 2013
AIFMD – what you
should be doing to
comply
By Shane Brett,
Managing Director
Global Perspectives
www.globalperspective.co.uk
A Global Perspectives White Paper

2. Contents
Introduction 2
1. Identifying the AIFM 2
2. Depository Selection 3
3. Authorisation 3
4. Third Country provisions 4
5. Delegation and Due Diligence 4
6. Remuneration policies 5
7. Leverage 5
8. Conclusion 5
Introduction
The AIFMD regulation comes into force
in the 27 countries of the European
Union in July 2013. The main tenets of
this wide ranging legislation are now
well known throughout the industry.
Put simply, AIFMD will change the
alternative investment industry forever.
This is the first in a 2 part Global
Perspectives white paper examining
what fund managers should be doing
right now to ensure they are ready for
AIFMD. We will publish Part 2 of this
white paper next month (June 2013).
Currently fund managers should be
completing a detailed impact
assessment to ensure they are ready for
AIFMD. Global Perspectives
(www.globalperspective.co.uk) can
assist in completing your AIFMD impact
assessment and implementing its
requirements.
1. Identifying the AIFM
The very first AIFMD task an Alternative
Investment Fund Manager (AIFM) must
complete is to identify who the fund
manager really is. The correct AIFM
must be identified for each Alternative
Investment Fund (AIF) in the
investment group.
This is crucial because this AIFM will be
the one legally responsible for ensuring
the AIF is compliant with all AIFMD
regulations.
Due to the complex structure of many
asset management groups this
identification process may not be
straight forward. Nevertheless this

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process must be completed
urgently as so many of AIFMD
numerous regulatory
requirements stem from this.
AIFMD establishes a vague test
for establishing the AIFM. The
primary consideration is which
entity carries out the funds’”
“investment management
functions”.
This is proving problematic for
European “managed account”
products.
2. Depository Selection
Under the AIFMD regulations
every AIFM must appoint a
“depositary” to safeguard the
investors in their funds. These
will work like super-charged
custodians who will closely
monitor the assets in the fund,
reconcile daily cash movements
and provide independent
verification that the fund is being
run properly and the assets are
where the manager says they
are.
The depository will be wholly
liable to the funds investors and
is assuming a very wide
responsibility of legal liability by
taking on this role (they are on
the hook even if the problem is in
a sub-custody network outside of
their control). Consequently only
large companies with deep
pockets will be able to offer this
service (often tier 1
administrators who are part of
global banks). One bankrupt fund
could easily bring down a large
bank. Depositories are expected
to charge handsomely for this
mandatory service.
Right now managers need to be actively
engaged in the depository selection
process. Managers should have begun
this selection process already, as it will
take time and is an important
investment decision.
Some depositories may not be willing to
support an investment strategy
weighted towards emerging markets or
exotic securities. For managers the
selection of a suitable, cost effective
depository aligned to their investment
strategy will be a key consideration.
For hedge fund and private equity
managers the cost and intrusive nature
of the new depository regime is a sea
change in operational practise.
3. Authorisation
All European AIFM’s must apply from
authorisation from their home country
regulators before July 22nd 2014 (i.e.
one year after AIFMD becomes law
throughout the European Union).
This approval process is not yet clear in
key hedge fund jurisdictions like the UK
(where over 80% of European hedge
funds are based). The application for
approval will likely require the fund
manager to demonstrate full compliance
with the 116 Articles of AIFMD.
Managers must be familiarising
themselves with the full spectrum of
AIFMD and how it will impact their
business. This includes everything from
depository requirements to
remuneration rules, to leverage
calculations and fund services
delegation.

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The extensive scope of this
analysis may require the
engagement of specialist
consulting expertise to assist in
analysing the business impact of
AIFMD.
Global Perspectives can provide
full support in your AIFMD impact
analysis.
4. Third Country provisions
AIFMD applies to any non-UCITS
fund managed or marketed in
the European Union. The rest of
the world is slowly waking up to
this.
Let us be clear – the non-
European world will have to
comply with AIFMD’s
requirements. The process for
these “Third Countries” will be
phased and gradual between now
and 2018, but going forward if a
non-European manager even
wants to road show a hedge fund
in Europe they will have to be
fully AIFMD compliant.
Non-EU managers should be
reviewing AIFMD to understand
their initial requirements. They
face a phased compliance period
until the current regime expires
in 2018. The initial rules require
non-EU managers to provide
“transparency reporting” with
details of the fund, its investment
strategy and its investments. This
includes private equity funds.
Further, more detailed,
obligations will follow over the
next 5 years.
Non-compliance with AIFMD will mean
being locked out of the world largest
trading block.
The rest of the world should think of
AIFMD like a European FATCA. i.e. non-
Europeans are being given no choice but
to fall into line and comply with AIFMD -
just like the rest of the world had no
choice but to comply with the US FATCA
rules - whether they liked it or not.
5. Delegation and Due Diligence
AIFMD has new rules around what is
required when a manager delegates
some of its duties to a 3rd party. This
obviously includes an investment
adviser or fund administrator.
These rules make the manager directly
responsible for the oversight of these
parties. AIFMD requires substantial
initial and on-going due diligence
required on all service providers.
Service providers themselves are also
now required now to complete extensive
due diligence on their manager/client so
managers need to be ready to
accommodate these requests and
meetings.
Managers should currently be engaged
in this due diligence process for both
new (e.g. depositories) and existing
(e.g. fund administrators) fund service
providers. Also it should be noted that
AIFMD contained additional, more
detailed rules regarding the delegations
of portfolio or risk management
functions outside the European Union.
Managers need to be considering these
additional requirements if they delegate
these functions.
The cumbersome nature of these due
diligence visits and checks may mean
managers or service providers will want

5. Global Perspectives
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to outsource this activity. Global
Perspectives can provide you with
full support for these due
diligence requirements.
6. Remuneration policies
Some of AIFMD’s most
controversial new rules are
around the area of hedge fund
remuneration. They require fund
manager remuneration policies to
be disclosed to investors and
regulators.
Remuneration must also be
weighted towards long-term
incentives. This means that
employees must be paid at least
half their bonus as shares in the
fund. Furthermore they are not
allowed to sell those shares for a
minimum of 3 (and preferably 5)
years.
AIFMs are also being asked to
introduce prudent remuneration
policies and organisation
structures to avoid a conflict of
interest or which may encourage
excessive risk-taking. The
implementation of the AIFM’s
remuneration policy must be
reviewed at least annually.
Right now managers need to be
reviewing their internal
remuneration policies and taking
steps to ensure it complies with
AIFMD. In certain cases this will
mean the establishment of a
remuneration committee (if the
managers total AUM is above
€1.25 billion).
All of this represents a huge
change for the remuneration
policies of most European hedge funds.
7. Leverage
AIFMD stipulates two brand new ways to
calculate leverage. These are the
“Gross” & “Commitment” methods.
The “Gross” method attempts to give a
picture of the funds overall exposure.
The “Commitment” method focuses
more on the hedging and netting
techniques used by the fund manager.
The key point here is that these are
new, compulsory methods for leverage
calculation. The more common “Value at
Risk” (VAR) methodology is not
acceptable.
Managers need to be working with their
system vendors and internal
departments to ensure these
calculations are built into their software
applications. They also need to be
making initial leverage calculations
using these new methodologies in
preparation for AIFMD.
This is important because managers will
have to report leverage to their home
regulators and to investors. They will
also have to monitor it closely and
advise investors if they breach their
stated leverage threshold.
8. Conclusion
The reward for complying with all of
AIFMD’s requirements will be an EU
“Passport” to offer alternative
investments across Europe, similar to
that of the existing UCITS Passport.
Over time this passport may become
the new “gold standard” of alternative
investment products and open up new

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Phone: +44 (0) 20 3239 2843
global opportunities to the
industry (e.g. in Asia and Latin
America)
Part 2 of this white paper
(released in June 2013) will
address the other main AIFMD
requirements that managers
should be addressing. These will
include:-
· Fund domiciliation,
· Fund manager liability,
· Investor and regulatory
reporting,
· Liaising with Service Providers,
· Internal organisational change,
· Managing illiquid investments.
· Market opportunities presented
by AIFMD
As can be seen from this white
paper the demands of AIFMD are
considerable. Global Perspectives
(www.globalperspective.co.uk)
can assist in completing your
AIFMD impact assessment and
implementing its requirements.
Sign up for all Global Perspectives
monthly White Papers at-
http://www.globalperspective.co.uk/#!wh
itepapers/c1a4e
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